Public Information Notices (PINs) form
part of the IMF's efforts to promote transparency of the IMF's
views and analysis of economic developments and policies. With the
consent of the country (or countries) concerned, PINs are issued
after Executive Board discussions of
Article IV
consultations with member countries, of its surveillance of
developments at the regional level, of post-program monitoring, and
of ex post assessments of member countries with longer-term program
engagements. PINs are also issued after Executive Board discussions
of general policy matters, unless otherwise decided by the
Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2005 Article IV consultation with Greece is also available.

On December 14, 2005, the Executive Board of the International
Monetary Fund (IMF) concluded the Article IV consultation with
Greece.1

Background

Economic growth has been very strong for several years,
underpinned by a large fall in interest rates due to adoption of
the euro and subsequent ECB easing, rapid increases in private
sector credit following the liberalization of the financial sector,
and an expansionary fiscal stance. In 2005, with the end of
Olympics spending and an associated sharp fiscal tightening, real
GDP growth slowed to an estimated 3½ percent,
still strong by international comparison. The long economic
expansion has been accompanied by the appearance of macroeconomic
imbalances. The fiscal position deteriorated significantly. In
2004, the general government deficit rose to
6.6 percent of GDP, the primary balance shifted
into deficit, and public debt stood at 111 percent of GDP.
Inflation has been running persistently above the euro-area
average, resulting in a gradual but steady erosion of
competitiveness and a decline in export market shares. And, despite
the extended period of strong growth, labor market performance
remains sub-par, with a high unemployment rate and low
participation rates.

In 2005, the authorities implemented substantial fiscal
consolidation, reducing the budget deficit to 4.6 percent of GDP on
staff calculations. Public sector investment spending contracted
with the end of the Olympics, current spending growth slowed
sharply, though from high rates, and interest costs fell. The draft
2006 budget contains further measures to bring the deficit to a
targeted 2.6 percent of GDP, consistent with Greece's commitments
to the EU under the excessive deficit procedure. However, about
one-third of the 2006 adjustment consists of temporary
measures.

The rising fiscal costs of population aging are the key
long-term threat to debt sustainability. Available estimates imply
these costs will rise by more in Greece than in any other EU
country between now and 2050. In the absence of strong corrective
action to put pensions and health care on a sustainable footing,
the result will be an explosive path of the public debt.

Economic growth in 2006 and beyond is likely to be moderate
compared to the high rates enjoyed in previous years, though it
should remain comfortably above the euro-area average. The erosion
of international competitiveness, needed fiscal consolidation, and
the gradual waning of the effects of euro-area entry and financial
liberalization all suggest growth will slow. The outlook depends,
however, on developments in Greece's export markets, notably the
shipping and tourism sectors, the EU, and on the evolution of the
price of oil.

The banking system, which dominates the financial sector,
appears well capitalized and profitable. However, several years of
rapid growth in private sector lending, albeit from low levels,
raises concerns that credit quality may deteriorate unexpectedly
should the economy slow substantially or interest rates rise
sharply, and non-performing loan ratios are already high for this
stage of the business cycle. The Bank of Greece, the supervisor,
has responded to risks by strengthening the prudential framework,
and commercial banks have also improved their risk management
capacity. The insurance sector, though not systemically important,
is weak and poorly supervised.

The authorities have recently introduced a number of significant
structural measures to improve product and labor markets. These
include reductions in the corporate tax rate, unified and extended
shopping hours, more flexible overtime, a new competition law and a
strengthened competition authority, further liberalization of gas
and electricity markets, simplification of business licensing, and
a new framework for public-private partnerships. More initiatives
are planned, including revision to bankruptcy legislation and
changes to management and employment contracts in state-owned
enterprises.

Executive Board Assessment

Directors welcomed the extended period of strong economic
growth, underpinned by low interest rates following adoption of the
euro, rapid credit expansion in the wake of financial sector
liberalization, and high investment and productivity growth. As a
result, the longstanding gap in living standards between Greece and
the euro-area average, while still wide, has narrowed significantly
in recent years. Directors also observed, however, that imbalances
have built up during the economic boom, with a marked deterioration
in the fiscal position and a gradual but steady loss of
competitiveness against the euro area as a result of a persistent
inflation differential.

Looking forward, Directors agreed that Greece's economic
prospects remain promising, especially if structural reforms are
implemented vigorously. Nevertheless, growth is likely to moderate
somewhat from the high rates seen recently, reflecting the erosion
of competitiveness, the waning of the stimulus from euro-area entry
and past financial-sector reform, and needed fiscal
consolidation.

Against a background of Greece's very high debt level and
prospective large aging costs, Directors stressed that fiscal
consolidation is the top economic policy priority for Greece.
They commended the authorities' substantial
reduction of the budget deficit in 2005 and their objective of
cutting it further to below 3 percent of GDP in
2006. Directors urged the authorities to implement additional and
durable measures to contain current spending and reach fiscal
balance by the end of the decade. They considered that strong
reforms to expenditure management and tax administration would be
essential to achieving this medium-term goal. Key priorities
include improving auditing, strengthening information management
systems, streamlining the control of spending, better prioritizing
expenditure, developing risk-based tax assessment and enforcement,
and strengthening measures to collect tax arrears. In addition, a
multi-year fiscal framework would enhance fiscal policy planning
and credibility. In this connection, Directors welcomed the
measures already taken by the authorities, especially to reform tax
administration and strengthen revenue collection. They encouraged
full and timely implementation of the recommendations of the recent
Fund technical assistance missions on tax administration and public
expenditure management, as well as the recommendations of the
Fiscal Report on the Observance of Standards and Codes. A number of
Directors also supported the authorities' decision not to follow
through with their plans to securitize tax arrears, emphasizing the
one-off nature of such a measure.

Directors noted the projected large increases in pension and
health costs owing to population aging, and highlighted the threat
this would pose to long-term debt sustainability. While welcoming
steps taken to raise awareness of the issue and involve the social
partners, Directors called on the authorities to accelerate
preparation of pension reforms, in order to ensure their early
implementation, including by updating projections of the fiscal
costs associated with aging as soon as possible. They also urged
that recent reforms to the health care system be followed up to
help contain prospective cost pressures.

Directors welcomed the FSAP report's conclusion that commercial
banks are well capitalized, profitable, and soundly supervised, and
encouraged the authorities to fully implement the report's
recommendations. They noted, however, that, after years of rapid
credit growth, credit risks might prove unexpectedly high,
especially in the event of an economic downturn or a significant
increase in interest rates. Moreover, Greek banks are relatively
small and have a high cost structure. Given these circumstances,
Directors called for continued strengthening of the supervisory
framework, close monitoring of bank assets and non-performing
loans, and further development of commercial banks' risk management
practices. Directors also observed that the insurance sector is
weak and poorly supervised, and urged the authorities to make the
new insurance supervisor fully operational and independent as soon
as possible.

Directors agreed that a key long-term policy challenge is to
improve productivity and competitiveness, thereby fostering high
economic growth and raising living standards.
They commended the authorities on recent
structural reforms in the product and labor markets, notably lower
corporate tax rates, more flexible shopping hours, easing of
overtime restrictions, a new competition law and a strengthened
competition authority, gas and electricity liberalization, and
simplification of business licensing. Directors encouraged the
authorities to build on this foundation by simplifying the tax
system and overhauling tax administration, cutting red tape for
businesses, further liberalizing gas and electricity, and ensuring
that the competition authority becomes more proactive.

On labor markets, where less reform has taken place despite the
chronically high unemployment rate and low participation, Directors
called for further easing of hiring and firing restrictions and
more flexibility in minimum wages, especially in sectors facing
economic pressures. Directors also expressed concern about the
medium-term effects of the ongoing loss of international
competitiveness. They stressed that, to stem the loss, the social
partners will need to limit wage growth to Greek productivity
growth and euro-area inflation.

Directors welcomed proposed reforms to state-owned enterprises
and the new framework law for public-private partnerships. They
judged that better governance of state-owned enterprises and more
flexible employment conditions would help to improve service
levels, reduce losses, and pave the way for further privatization
where appropriate. Public private partnerships could help to foster
needed infrastructure investment. Directors emphasized, however,
that transparent and full accounting would be central to the proper
assessment of current and future fiscal costs of projects, and that
large public investment projects should be brought under the
framework.

Directors welcomed improvements to economic data, especially to
the fiscal data in the wake of last year's fiscal audit carried out
by the authorities in cooperation with Eurostat. At the same time,
they considered that further strengthening would be desirable. In
particular, strengthened reporting of fiscal data, including the
publication of financing-side fiscal data, will help increase the
credibility of fiscal policy. Also important will be improved
quarterly national accounts data, which are under preparation, and
formal independence for the statistical service.

Greece: Selected Economic Indicators,
2001-06

2001

2002

2003

2004

2005

2006

Proj.

Proj.

Real economy (change in percent)

Real GDP

4.6

3.8

4.6

4.7

3.5

3.3

Final domestic demand

2.7

4.5

5.7

4.6

3.1

3.9

Private consumption

2.9

3.3

4.5

4.4

4.4

4.0

Public consumption

-1.5

7.3

-2.1

3.9

1.1

0.6

Gross fixed capital formation

4.9

6.0

13.7

5.7

1.0

5.4

Foreign balance (contribution)

1.7

-1.1

-1.4

-0.5

0.1

-1.0

Unemployment rate (in percent)

10.8

10.3

9.7

10.5

10.0

10.0

Employment

-0.1

2.2

2.4

0.9

1.1

0.5

Unit labor costs (economy wide)

2.8

3.0

2.4

3.2

3.3

3.0

GDP deflator

3.5

4.0

3.5

3.6

3.6

3.3

CPI (year average)

3.7

3.9

3.4

3.0

3.6

3.3

Public finance (percent of GDP)

General government balance

-6.1

-4.9

-5.7

-6.6

-4.6

-2.7

General government primary balance

1.2

1.3

0.0

-0.9

0.7

2.2

General government structural balance

-6.1

-5.0

-6.1

-7.4

-5.2

-3.2

General government gross debt

114

112

109

111

108

104

Money and credit (end of year, percent change)

Domestic credit 1/

9.3

8.5

3.0

7.7

10.1

...

Interest rates (percent)

Deposit rate 1/

3.3

2.8

2.5

2.3

2.2

...

Government bond yield 1/

5.3

5.1

4.3

4.3

3.5

...

Balance of Payments (in percent of GDP, unless otherwise
noted)

Exports of goods and services

25.5

22.2

21.1

23.6

24.1

24.7

Imports of goods and services

35.0

30.6

28.3

29.5

29.3

30.2

Trade balance

-9.5

-8.4

-7.2

-6.0

-5.2

-5.5

Current account

-6.2

-6.0

-5.6

-3.8

-3.2

-3.6

Exchange rate

Exchange rate regime

Euro area

Present rate (December 9, 2004)

Nominal effective exchange rate (1990=100) 2/

62.4

63.4

65.8

66.4

66.2

...

Real effective exchange rate (1990=100) 2/

108.9

112.1

117.8

119.9

121.3

...

Sources: National Statistical Service; Ministry of National
Economy; Bank of Greece; IMF, World Economic Outlook; and
IMF staff estimates and projections.

1/ Staff estimates. Latest data is for September (domestic
credit, deposit rate); October (government bond yield); and August
(M3).
2/ As of September 2005.

1
Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board. At the conclusion of the discussion, the Managing
Director, as Chairman of the Board, summarizes the views of
Executive Directors, and this summary is transmitted to the
country's authorities.